QRE Buys
Purchase of upstream oil-producing assets with 10.7 million BOE in proved reserves in AK, LA, TX.
QR Energy LP (NYSE: QRE) plans to buy producing oil properties in Arkansas, Louisiana and Texas from an undisclosed private seller for about $215 million in cash.
The assets have total proved reserves of about 10.7 million barrels of oil equivalent (MMBOE) as of Nov. 1, 99% of which are proved, developed and 76% of which are proved, developed producing. About 90% of the proved reserves are oil. The net production from the assets is about 1,400 BOE per day, 90% of which is oil. More than 90% of the acreage is operated.
The estimated maintenance capital expenditures for the acquired assets is about $3 million per year, about 10% of the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from the assets.
QR Energy said the acquisition is a mature, legacy asset in the East Texas Field, with properties that directly overlap existing QR Energy properties in East Texas. The assets also have significant low-risk development opportunities, including artificial lift upgrades, recompletions, deepenings and waterflood potential.
The assets have a reserve-to-production ratio of about 20.9 years, with a low decline rate of 6% to 7% per year and 397 active wells.
In addition, QR Energy said a “significant portion” of the production is hedged through 2017. QR Energy chief executive Alan L. Smith said the profile of the assets fit well with the company’s existing assets and overall business strategy of pursuing long-life, producing assets.
"This is a world class oil field that is built for an MLP. The asset base is an excellent fit with our investment criteria of low decline, long reserve life properties with identified low-risk oil development for years to come. These properties literally overlap with our existing East Texas assets making this deal very complementary to our business," he said.
QR Energy will finance the purchase with cash on hand and borrowings under its bank credit facility. The transaction is expected to close in the first half of December.
Houston-based QR Energy is an upstream publicly-traded master limited partnership that focuses on producing assets with a low decline rate. It has assets in the Permian Basin, the Midcontinent, the Gulf Coast, Michigan and Arkansas-Louisiana-Texas.
Analysts studying the acquisition were quick to give it their approval. Raymond James Equity Research agreed with QR Energy management that the deal would be accretive to earnings.
“There is plenty to like about this transaction. First, the new assets fit nicely within QR Energy's existing footprint. Second, we like that these properties are highly developed. Finally, we like the fact that there is potential for further production growth. After a fairly rocky year, QR Energy's outlook continues to improve,” according to a report from the analysts.
Raymond James also liked the fact that QR Energy management is on scheduled to complete a large drop-down from its parent in the next two to three months. The report reiterated its “Outperform” rating for the company. Raymond James said the transaction price of $215 million is about 7.3 times EBITDA, which is not cheap, but fair for the high quality assets acquired. The transaction adds an estimated $29 million of adjusted EBITDA, or about 12 cents per unit in annual accretion, according to Raymond James Equity Research.
“The acquired properties have a very high R/P ratio (20.9 years) due to its shallow decline rate (6-7%), thereby making it an ideal asset for an upstream MLP. On other metrics, QR Energy paid a rather full price at roughly $20.09 per proved BOE and $153,571 per flowing BOE,” according to the report.
Given the low decline rates and the forecasted maintenance capital expenditures for the assets, Raymond James said it is lower than maintenance capital expenditures of other upstream MLPs, which pay between 20% and 30% of EBITDA to maintain production.
Raymond James analysts saw no problems with the plans to finance the acquisition through debt and cash on hand. “Keep in mind the partnership raised roughly $290 million in senior notes in third quarter 2012 to help pay down its revolver. Taking this into account and assuming QR Energy receives credit for roughly 50% of the purchase price incremental to its borrowing base, we expect the new borrowing base to be roughly $830 million,” according to Raymond James analysts. With an estimated $490 million in debt drawn after closing, the base will be about 59% drawn.
Based on the new properties, Raymond James increased QR Energy’s estimated earnings per unit to $1.24 from a previous estimate of $1.14. In addition, it increased the estimated EBITDA for 2013 to $286 million from $259 million.